(4) Acquisition

9 Months Ended

Sep. 30, 2013

Notes

(4) Acquisition

(4) Acquisitions

Texadian Energy, Inc. (formerly known as SEACOR Energy Inc.)

On December 31, 2012, we acquired Texadian, an indirect wholly-owned subsidiary of SEACOR Holdings Inc., for $14.0 million plus estimated net working capital of approximately $4.0 million at closing resulting in approximately $18.0 million of cash paid at closing. Texadian operates an oil transportation, distribution and marketing business with significant logistics capabilities. We acquired Texadian in furtherance of our growth strategy that focuses on the acquisition of income producing businesses. The purchase price for the acquisition was funded with a combination of cash and additional borrowings under the Tranche B Loan (see Note 6).

 The purchase was accounted for as a business combination in accordance with ASC 805 whereby the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. Goodwill is defined in ASC 805 as the future economic benefit of other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is attributable to opportunities expected to arise from combining our operations with Texadian’s, and specifically utilization of our net operating loss carryforwards, as well as other intangible assets that do not qualify for separate recognition. In addition, we recorded certain other identifiable intangible assets. These include relationships with suppliers and shippers and favorable railcar leases. These intangible assets will be amortized over their estimated useful lives on a straight line basis, which approximates their consumptive life.

A summary of the fair value of the assets acquired and liabilities assumed is as follows (in thousands):

Intangible assets	$	8,809
Goodwill		8,290
Net non cash working capital		3,097
Deferred tax liabilities		(2,757	)
Total, net of cash acquired	$	17,439

None of the goodwill or intangible assets are expected to be deductible for income tax reporting purposes.

The results of operations of Texadian are included in our consolidated statement of operations beginning January 1, 2013. We have not presented pro forma results for Predecessor periods as the entities are not comparable.

Hawaii Independent Energy, LLC (formerly known as Tesoro Hawaii, LLC)

On June 17 , 2013 (the “Execution Date”), our wholly-owned subsidiary, Hawaii Pacific Energy, entered into a membership interest purchase agreement (the “Purchase Agreement”) with Tesoro Corporation, (the “Seller”) and solely for the purpose set forth in the Purchase Agreement, Tesoro Hawaii, LLC (“Tesoro Hawaii”). Pursuant to the Purchase Agreement, on September 25, 2013 (the “Effective Date”), Hawaii Pacific Energy purchased from the Seller all of the issued and outstanding units representing the membership interests in Tesoro Hawaii (the “Purchased Units”), and indirectly thereby also acquired Tesoro Hawaii’s wholly owned subsidiary, Smiley’s Super Service, Inc. Tesoro Hawaii owns and operates (i) a petroleum refinery located at the Campbell Industrial Park in Kapolei, Hawaii (the “Refinery”), (ii) certain pipeline assets, floating pipeline mooring equipment, and refined products terminals, and (iii) retail assets selling fuel products and merchandise on the islands of Oahu, Maui and Hawaii. Following the acquisition, Tesoro Hawaii was renamed Hawaii Independent Energy, LLC (“HIE”).

Hawaii Pacific Energy purchased the Purchased Units for $75.0 million plus or minus adjustments for net working capital, plus adjustments for inventories at closing and plus certain contingent earnout payments of up to $40.0 million. The earnout payments, if any, are to be paid annually following each of the three calendar years beginning January 1, 2014 through the year ending December 31, 2016, in an amount equal to 20% of the consolidated annual gross margin of HIE in excess of $165.0 million during such calendar years, with an annual cap of $20.0 million. In the event that the Refinery ceases operations or in the event Hawaii Pacific Energy disposes of any facility used in the acquired business, Hawaii Pacific Energy's obligation to make earnout payments could be modified and/or accelerated as provided in the Purchase Agreement. The purchase price was paid with a portion of the net proceeds from the sale of the shares of our common stock in a private transaction, amounts received pursuant to the Supply and Exchange Agreements as described below and the ABL Facility (see Note 6).

Prior to the Execution Date, the Seller had commenced activities to shutdown the Refinery and to convert it into an import terminal. The Purchase Agreement contains certain pre-closing covenants, including covenants related to the startup of operations at the Refinery (the “Refinery Startup Activities”). The expenses associated with the Refinery Startup Activities were approximately $28.0 million (the “Startup Expenses”). Pursuant to the terms of the Purchase Agreement, Hawaii Pacific Energy made an initial deposit of $15.0 million for the Startup Expenses on the Execution Date. The next $5.0 million of Startup Expenses were borne by the Seller, with all Startup Expenses in excess of $20.0 million borne by Hawaii Pacific Energy. Due to the Startup Expenses exceeding $20.0 million, Hawaii Pacific Energy made an additional deposit of $7.0 million for the Startup Expenses on August 5, 2013.  In addition, Hawaii Pacific Energy funded $2.3 million on July 23, 2013 for a major overhaul of a gas turbine engine used in the operations of the refinery's steam cogeneration. These amounts are considered as additional consideration for the Purchased Units.

 Supply and Exchange Agreements

On September 25, 2013 and in connection with the acquisition by Hawaii Pacific Energy of the Purchased Units, HIE entered into the following agreements with Barclays Bank PLC, a public limited company organized under the laws of England and Wales (“Barclays”): (i) a framework agreement (the “Framework Agreement”) to which Hawaii Pacific Energy is also a party; (ii) a 2002 ISDA Master Agreement, including the Schedule thereto, the Oil Annex incorporated therein, the 1994 Credit Support Annex (New York law), the Initial Crude Purchase Confirmation, the Initial Product Purchase Confirmation, the Crude Oil Supply Master Confirmation, the Oil Products Exchange Master Confirmation, the Products Offtake Master Confirmation and the Confirmation of Forward Purchase Agreement for Refined Products (collectively, the “ISDA Agreement”); (iii) a storage and services agreement (the “Storage and Services Agreement”); and (iv) an agency and advisory agreement (the “Advisory Agreement” and, collectively with the Framework Agreement, ISDA Agreement and Storage and Services Agreement, the “Supply and Exchange Agreements”).

Pursuant to the Supply and Exchange Agreements, Barclays purchased the crude oil and refined product inventory owned by HIE on the Effective Date, and following the Effective Date, will (A) provide crude oil supply and intermediation arrangements to meet the processing needs of HIE’s petroleum refinery located at the Campbell Industrial Park in Kapolei, Hawaii (the “Refinery”), (B) provide a refined product exchange mechanism to HIE permitting it to flow volumes of refined product through Barclay’s inventory, and (C) store its crude oil and refined product inventory at the terminals and related facilities owned and operated by HIE.

Set forth below are certain of the additional material terms of the Supply and Exchange Agreements:

Term: The Supply and Exchange Agreements will remain in effect for three years following the Effective Date, subject to HIE’s right to extend the term for two additional one-year terms.

Covenants: The Supply and Exchange Agreements require HIE and Hawaii Pacific Energy to comply with various affirmative and negative covenants affecting their respective businesses and operations, including compliance by HIE with a minimum liquidity requirement.

Exclusivity: During the term of the Supply and Exchange Agreements, HIE agrees not to purchase crude oil from any party other than Barclays, except for purchases of an amount and grade of crude oil roughly equivalent to that set forth in a transaction supplement pursuant to the ISDA Agreement that has been rejected by Barclays three consecutive times.

Collateral: All obligations arising under the Supply and Exchange Agreements are secured by a lien in favor of Wells Fargo Bank, N.A., as collateral agent for Barclays (in such capacity, the “Inventory Agent”), on substantially all of HIE’s assets, including, but not limited to, the Refinery and all of its accounts receivable, facilities, real property and improvements, pursuant to an inventory first lien security agreement (the “Inventory Security Agreement”), an inventory second lien security agreement (the “Inventory Second Lien Security Agreement”) and a first lien mortgage (the “Inventory Mortgage”). The rights and remedies of the Inventory Agent, and the priority of the Inventory Agent’s security interest in the collateral, are subject to an intercreditor agreement dated as of the Effective Date (the “HIE Intercreditor Agreement”), among Barclays, the Inventory Agent, Deutsche Bank AG New York Branch, acting as collateral agent under the ABL Facility (as defined below) and as administrative agent under the ABL Facility, and Hawaii Pacific Energy and HIE, as grantors. In addition, pursuant to the ISDA Agreement, HIE may be required to provide additional credit support to Barclays in the form of cash, letters of credit and/or negotiable debt obligations of the U.S. Treasury Department.

Guaranty and Pledge by Hawaii Pacific Energy: Hawaii Pacific Energy has granted a security interest in favor of the Inventory Agent in all of the membership interests Hawaii Pacific Energy owns in HIE (the “Inventory Pledged Collateral”) pursuant to a Membership Interests First Lien Pledge Agreement in favor of the Inventory Agent (the “Inventory Pledge Agreement”). The obligations of HIE under the Supply and Exchange Agreements are guaranteed by Hawaii Pacific Energy, however, the recourse of the Inventory Agent under Hawaii Pacific Energy’s guaranty is limited to the Inventory Pledged Collateral plus certain fees and expenses specified therein to the extent incurred by Barclays or the Inventory Agent in connection with the enforcement or protection of their rights thereunder. The rights and remedies of the Inventory Agent, and the priority of the Inventory Agent’s security interest in the Inventory Pledged Collateral, are subject to the HIE Intercreditor Agreement.

The purchase of the purchased units was accounted for as a business combination in accordance with ASC 805 whereby the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. Goodwill is defined in ASC 805 as the future economic benefit of other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is attributable to opportunities expected to arise from combining our operations with HIE’s, and specifically utilization of our net operating loss carryforwards, as well as other intangible assets that do not qualify for separate recognition. In addition, we recorded certain other identifiable intangible assets. These include trade names and trademarks. These intangible assets will be amortized over their estimated useful lives on a straight line basis, which approximates their consumptive life.

The purchase price allocation is tentative and preliminary. We may have material changes to working capital, goodwill and various other assets and liabilities as better information becomes available in the fourth quarter. A summary of the preliminary estimated fair value of the assets acquired and liabilities assumed is as follows (in thousands):

Property, plant and equipment	$	66,144
Land		39,800
Goodwill		5,203
Intangible assets		4,782
Net working capital		462,427
Contingent consideration liability		(10,500	)
Other noncurrent liabilities		(8,249	)
Total, net of cash acquired	$	559,607

The acquisition was partially funded from net proceeds totaling approximately $384.9 million from the Supply and Exchange Agreements described above. We incurred approximately $1.0 million of expense associated with the acquisition. The results of operations of HIE are included in our consolidated statement of operations beginning September 25, 2013. We have not presented pro forma results for Predecessor periods as those Predecessor periods are not comparable to the current periods.